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IT 361: E-Commerce Systems

Chapter 6

Online Retail and Services

Readings: Chapter 9 - Online Retail and Services

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Blue Nile Sparkles For Your CleopatraClass Discussion

• Why is selling (or buying) diamonds over the Internet so difficult?

• How has Blue Nile built its supply chain to keep costs low?

• How has Blue Nile reduced consumer anxiety over online diamond purchases?

• What are some vulnerabilities facing Blue Nile?• Would you buy a $5,000 engagement ring at

Blue Nile?

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Major Trends in Online Retail, 2007-2008

• Social shopping…• Online retail increasingly profitable• Buying online becomes normal, mainstream experience• Selection of goods online increases, including customized goods• Average annual amount of purchases increases• Specialty retail sites show most rapid growth• Increased emphasis on improved shopping experience• Increased use of interactive multimedia marketing• Retail intermediaries strengthen in many areas• Retailers increasingly efficient at integrating multiple channels• Personalized goods, especially in apparel, become financially successful.• Online shopping becomes more multi-seasonal• Most online shopping occurs at work, evenings at home

See also Table 9.1, Page 551.

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The Retail Sector• Durable vs. nondurable goods• Goods vs. Services, “product-based services”• Most important theme in online retailing is effort to

integrate online and offline operations• Retail industry can be divided into segments, each of

which offers opportunities for online retail• Biggest opportunities for online retail sales: Those

segments that sell small ticket items (specialty stores, general merchandisers, mail-order catalogs, groceries)

• Specialty stores success depends on building a unique product for a market segment, strong customer service, persuasive shopping experience)

• Mail order/telephone order (MOTO) sector most similar to online retail sector – fastest growing (have fulfillment system, sophisticated inventory control system, customer database, large scale)

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Composition of the U.S. Retail IndustryEach offer opportunity for online retail, yet the use of internet may differ (information and purchasing)

SOURCE: Based on data from U.S. Census Bureau, 2007.

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Online Retailing: The Vision• Greatly reduced search & transaction costs on the Internet

would encourage consumers to abandon traditional marketplaces in order to find lower prices for goods (cost-driven vs. brand-driven). Only low-cost high quality merchant will survive.

• Market entry costs would be much lower than those for physical storefronts, and online merchants would be more efficient than offline competitors. Low customer acquisition cost because of the search engines.

• Traditional offline physical store merchants would be forced out of business. First-mover advantage will lock competitors.

• Some industries would become disintermediated as manufacturers built direct relationship with consumer

• hypermediation

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Online Retailing: The Vision

• Ultimately, few of the above assumptions proved to be correct, and structure of retail marketplace in the U.S. has not been revolutionized

• Few pure online businesses were successful• Consumers consider brand name, trust, reliability and

delivery time.• Internet

– created new venue for multi-channel firms to strengthen their offline brands

– supported both general and specialized merchants– Created marketplaces for consumers to conveniently shop– Multi-channel can be manage and turned into strength

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The Online Retail Sector Today• Online retailing segment, although smallest

segment of retail industry, is growing at exceptionally fast rate

• Online retail revenues: $137 billion, 120 million consumers estimated for 2007

• Primary beneficiaries of growing consumer support: Established offline retailers with an online presence

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Online Retail and B2C E-commerce is Alive and Well

Figure 9.2, Page 556

SOURCES: Based on data from eMarketer, Inc. 2007a; U.S. Department of Commerce, 2007; Forrester Research, 2006; authors’ estimates.

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ChallengesOnline: turn visitors to customers, and develop

efficient operations to achieve profitabilityOffline: Integrate offline and online channels so

customer can move seamlessly from one environment to another

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Multi-Channel Integration• Integration methods• In the past, tradition physical store retailers

moving towards the web. In the future, online retailers may develop physical retails stores

• Intermediaries continue to play• Consumers are attracted to stable, well-

known, trusted retail brands

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Analyzing the Viability of Online Firms: Strategic Analysis

• Strategic analysis of economic viability of a firm focuses on both industry as a whole and firm

• Key industry strategic factors:– Barriers to entry– Power of suppliers– Power of customers– Existence of substitute products– Industry value chain– Nature of intra-industry competition

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Analyzing the Viability of Online Firms: Strategic Analysis (cont’d)

• Strategic factors that pertain to firm include:– Firm value chain– Core competencies– Synergies– Technology– Social and legal challenges

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Analyzing the Viability of Online Firms: Financial Analysis

• Financial analysis helps us understand how a firm is performing

• Includes two main parts:– Statement of Operations: Tells us how much income or

loss a firm is achieving based on current sales and costs– Balance sheet: Provides a financial snapshot of a

company’s assets and liabilities

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Analyzing the Viability of Online Firms: Financial Analysis (cont’d)

• Factors in assessing Statements of Operations– Revenues: growing and at what rate?– Cost of sales: compared to revenues– Gross margin (gross profit divided by net sales): increasing or

decreasing?– Operating expenses: What are they; increasing or decreasing?– Operating margin: Indication of company’s ability to turn sales

into pre-tax profit after operating expenses are deducted– Net margin (net income or loss divided by net sales or

revenue): increasing or decreasing?

2006 2005 2004RevenueNet Sales 10,711 8,490 6,921 Cost of Sale 8,255 6,451 5,319 Gross Profit 2,456 2,039 1,602 Gross margin 23% 24% 23%Operating ExpensesMarketing 259 192 158 Fulfillment 913 729 590 Technology 608 406 251 G&A 176 146 112 Stock-based compensation - - 57

Other operating expenses 10 47 7-

Total operating expenses 1,966 1,520 1,161 Income from operating 490 519 441 operating margin 5% 6% 6%

Total non-operating expenses 12 4 84income before income taxes 478 515 357 Provision (benefit) from income taxes 187 95 -232

Net income 291 420 589 Net margin 3% 5% 9%

Is the firm gaining or losing market power vs suppliers?

Ability to turn sales into pre-tax profit after deducting operation expenses

2006 2005 2004

Assets

Cash 2,019 2,000 1,779

Current Assets 3,373 2,929 2,539

Assets 4,363 3,696 3,248

Liabilities

Current liabilities 2,532 1,899 1,620

long-term debts 1,400 1,521 1,855

working capital 841 1,030 919 sustainability

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Analyzing the Viability of Online Firms: Financial Analysis (cont’d)

• Factors in assessing a Balance Sheet:– Current assets– Current liabilities– Ratio of current assets to liabilities (working capital)– Long-term debt

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E-tailing Business Models

• Four main types of online retail business models:– Virtual merchant– Bricks-and-clicks– Catalog merchant– Manufacturer direct

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Virtual Merchants

• Single channel Web firms that generate almost all revenues from online sales

• Challenges: Build a business and brand from scratch, quickly, new channel and confront virtual merchant competitor

• Costs: web site, order fulfillment system and brand name, and customer acquisition

• Low gross margin• To preserve profit and cover operation cost

– High efficient operation– Build brand name quickly to attract customers

• Example: Amazon

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E-commerce in Action: Amazon.com

• Vision: Earth’s biggest selection, most customer-centric

• Business Model: – Retail– Service

• Merchant– Amazon Enterprise Solutions– Marketplace (Individuals * small business)– Merchant@ (large; rent, order entry, payment)– Amazon Service Program (operate other business)

• Developer (computing power; S3, EC2)

• Business Model– No inventory – specialized store– Retailer– Trading platform

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2006 2005 2004RevenueNet Sales 10,711 8,490 6,921 Cost of Sale 8,255 6,451 5,319 Gross Profit 2,456 2,039 1,602 Gross margin 23% 24% 23%Operating ExpensesMarketing 259 192 158 Fulfillment 913 729 590 Technology 608 406 251 G&A 176 146 112 Stock-based compensation - - 57

Other operating expenses 10 47 7-

Total operating expenses 1,966 1,520 1,161 Income from operating 490 519 441 operating margin 5% 6% 6%

Total non-operating expenses 12 4 84income before income taxes 478 515 357 Provision (benefit) from income taxes 187 95 -232

Net income 291 420 589 Net margin 3% 5% 9%

Financial Analysis: Greatly improved overall operational position, but not yet consistently profitable

2006 2005 2004

Assets

Cash 2,019 2,000 1,779

Current Assets 3,373 2,929 2,539

Assets 4,363 3,696 3,248

Liabilities

Current liabilities 2,532 1,899 1,620

long-term debts 1,400 1,521 1,855

working capital 841 1,030 919

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E-commerce in Action: Amazon.com• Business strategy:

– Maximize revenue • Expand 3rd party seller• More focused stores

– Cutting costs• SCM• Fulfillment system• Mathematicians (warehouses, size of shipment, consolidation of

orders)

• Competition: General merchandisers who are both offline and/or online

• Technology: Largest, most sophisticated collection of online retailing technologies available

• Social, Legal: Securities, anti-trust lawsuits• Future Prospects: Long-term profitability still uncertain

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Multi-channel Merchants: Bricks and Clicks Companies that have network of physical stores as

primary retail channel, but also online offerings Cost: physical building and sales staff. low customer

acquisition cost Advantages: brand name, customer base,

warehouses, large scale and trained staff Challenges:

Leverage their strength and assets to the web Building credible web site New skilled staff Raped response order entry and fulfillment system

Examples: Wal-Mart, J.C. Penney, Sears

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JCPenny

• 1902: Department store• Catalog mail-order• 1998: online catalog• Return either at store or mail• Essence: complete integration of offline and online• Understanding customer preferences

(products/channel)• Interactivity and imaging tools (zoom, custom)

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Catalog Merchants Established companies that have national offline

catalog operation as largest retail channel, but also have online capabilities

Examples: Lands’ End (personal shopper, Virtual model, land’s End custom), Victoria’s Secret

High cost of printing and mailing Efficient operation, few-No physical stores, fulfillment

system Challenges (bricks-&-clicks)

Leverage their existing assets and competenciesCredible web siteNew staff

Advantage: already posses very efficient fast response order entry and fulfillment system

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Manufacturer-Direct

Single or multi-channel manufacturers who sell directly online to consumers without intervention of retailers

Challenges Channel conflict (compete in price and currency of

inventory)Developing fast-response online order & fulfillment

systemAcquiring customersCoordinating supply chain with market demand

Supply-push model vs. demand-pull model Advantage: low cost structure – high gross margin Example: Dell

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Common Themes in Online Retailing• Online retail fastest growing channel, has fastest growing

consumer base, growing penetration rate across many categories of goods

• Many online retail firms have begun to raise prices• Disintermediation has not occurred, and most manufacturers

use Web primarily as an informational resource• Most significant online growth has been that of offline giants

who are focusing on extending brand to online channel• Second area of rapid growth: specialty merchants

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Insight on Technology: Using the Web to Shop ‘Till You Drop

Class Discussion

• What do shopping bots and comparison sites offer consumers?

• Why are shopping bots more successful with hard goods than soft goods?

• What is the strategy of Shopping.com?• How can shopping bots compare luxury

goods?• How will adding content to comparison

sites help consumers?

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The Service Sector: Offline and Online

• Service sector: Largest and most rapidly expanding part of economies of advanced industrial nations

• In the United States, services employs about 76% of labor force; accounts for $7.1 trillion of GDP in 2007

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What are Services?

• Service occupations: “Concerned with performing tasks” in and around households, business firms, and institutions

• Service industries: “Domestic establishments providing services to consumers, businesses, governments, and other organizations”

• Major service industry groups:– FIRE (Finance, insurance, real estate)– Travel – Professional services (legal, accounting)– Business services (consulting, advertising & marketing, Info

Processing)– Health services– Educational services

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Categorizing Service Industries

• Within service industry groups, can be further categorized into:– Transaction brokers– Hands-on service provider

• Services industry features:– Knowledge- and information-intense, which makes

them uniquely suited to e-commerce applications– Amount of personalization and customization required

differs depending on type of service

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Online Financial ServicesOnline Banking, Mortgage, Insurance, Real estate• Online financial services sector example of e-

commerce success story, but success is somewhat different from what had been predicted– Pure online firms were instrumental in

transforming the brokerage industry– Less impact in banking, insurance & real estate)

• Multi-channel established financial services firms are showing fastest growth and strongest prospects

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Online Financial Consumer Behavior

• Consumers attracted to online financial sties because of desire to save time and access information rather than save money

• Most online consumers use financial services firms for mundane financial management (check balance)

• Once accustomed, customers move to more sophisticated capabilities (paying loans)

• Greatest deterrents are fears about security and confidentiality

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Online Banking

• Online banking pioneered by NetBank and WingSpan

• Established brand name national banks have taken substantial lead in market share

• Over 80 million people use online banking, and around 40 million households

• Movement toward online banking is global

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Online Brokerage

• Early online brokerage leaders, such as E*Trade and Ameritrade have been displaced at top by established firms (Fidelity and Charles Schwab)

• About 6 million U.S. households trade online

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Multi-channel vs. Pure Online Financial Service Firms

• Online consumers have made it known that they prefer multi-channel firms with physical presence

• Multi-channel firms are growing faster and have lower customer acquisition, conversion, and retention costs

• However, users of pure online firms utilize them more intensively & has strong telephone presence. Limited services.

• Pure online customers are price-driven

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Financial Portals and Account Aggregators• Financial portals: Provide comparison shopping services,

independent financial advice and financial planning– Examples: Yahoo! Finance, Quicken.com, MSN Money, AOL’s

Money and Finance channel• Account aggregation: Process of pulling together all of a

customer’s financial (and even non-financial) data at a single personalized Web site– Yodlee, a leading provider of account aggregation technology;

used by Merrill Lynch, Citigroup, Chase, others– Raises issues about privacy and control of personal data, security,

etc.

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Online Mortgage and Lending Services• Early entrants envisioned market in which mortgage value

chain would be simplified and loan closing process speeded up, with resulting cost savings passed on to consumer

• However, many of early-entry, pure online firms failed (e.g., Mortgage.com) due to difficulties of developing brand and simplifying mortgage generation process (high startup rate, acquisition cost, rising interest rate, poor execution)

• Today, four basic types of online mortgage vendor:– Established online banks, brokerages, and lending organizations– Pure online mortgage bankers– Mortgage brokers

• Customer benefit from online mortgage:– Reduced application times– Market interest rate intelligence– Process simplification

• Lender benefits– Cost reduction

Online mortgage industry has not transformed the process of obtaining mortgage, but the ability to shop online

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Online Insurance Services• Online term life insurance: one of few product groups in

which Internet actually lowered search costs, increased price comparison, and resulted in lower prices to consumers

• However, in other insurance product lines, Web has offered insurance companies new opportunities for product and service differentiation and price discrimination

• Leading players include InsWeb, Progressive and Insure.com

• Like mortgage, online insurance was successful in attracting shoppers

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Online Real Estate Services• Early visions (that the historically local, complex, and

agent-driven real estate industry would be transformed into a disintermediated marketplace where buyers and sellers would transact directly) has not been realized

• Extream benefit for buyers, sellers and agets.• Major impact is influencing of purchases offline and not

completing the entire process• Primary service is listing of properties (Rich, tools, reports)• Despite revolution in available information, there has not

been a revolution in the industry value chain

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Online Travel Services• Arguably, single most successful B2C e-commerce

segment; attracts single largest audience, and largest slice of B2C revenues

• Internet becoming most common channel used to research travel and book reservations

• 2007: $94 billion in revenue, expected to grow to $146 billion by 2010

• Popular because they offer consumers more convenience (one stop; offers content, commerce, community, customer service) than traditional travel agents

• For suppliers, offers a singular, focused customer pool that can be efficiently reached

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Travel as an Ideal Internet Product/Service• Information-intensive product• Electronic product in the sense that travel

arrangements can be accomplished for the most part online

• Does not require inventory• Suppliers are always looking for customers to

fill excess capacity• Do not require an expensive multi-channel

presence

Online Travel Services Revenues

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Online Travel Services Components

• Airline reservations the largest single component (2/3 of all online travel spending)

• Hotel reservations (19% of online travel spending)• Car reservations (9% of online travel spending)• Cruise/tour reservations: fairly slow growth since not as well

suited for online environment• Major segments:

– Leisure – Business travel – expected to be a major growth area as corporations

seek better control of corporate travel expenses (COBS)

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Insight on Business: ZipcarsClass Discussion

• What is the Zipcar business model? How does it make money?

• How does Zipcar use the Internet?• Does Zipcar compete with traditional car

rental firms?• Will Zipcar work only in urban markets? Can it

expand to the suburbs?

Online Travel Industry Dynamics

• Meta-search engines, Competition among online providers is intense (commodity, focus on scope, ease of use, payment options and personalization)

• Industry is going through a period of consolidation as stronger, offline established firms purchase weaker and relatively inexpensive online firms

• Suppliers (the large national airlines, hotel chains, auto rental companies, etc.) are attempting to eliminate the intermediaries such as the global distribution systems and travel agencies, using Web as means

• Mobile

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Online Career Services• Next to travel services, one of Internet’s most successful

online services.• Dominated by CareerBuilder, Monster (owned by Monster

Worldwide), and Yahoo HotJobs • Online recruiting provides more efficient and cost-

effective method of linking employers and potential employees, while reducing total time-to-hire

• Enables job hunters to more easily build, update, and distribute resumes while gathering information about prospective employers and conducting job searches

• Ideally suited for Web due to information-intense nature of process

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Recruitment Market Segments

• Three major segments– General job recruitment: Largest segment and primary

focus– Executive search: highest revenue potential– Specialized job placement services: often run by

professional societies

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Online Recruitment Industry Dynamics

• Major trends:– Consolidation: CareerBuilder, Monster, and HotJobs

together dominate the market– Diversification of product line: niche sites– Localization: Local boards compete with local

newspapers, Craigslist– Job search engines “scrape” listings: Indeed.com,

SimplyJobs, JobCentral– Social networking: LinkedIn; Facebook apps– Mobile